1 ■ 




TLbe "ClniversitE of Cbtcago 

FOUNDED BY JOHN D. ROCKEFELLER 



THE DEMAND AND SUPPLY CON 

CEPTS. AN INTRODUCTION TO 

THE STUDY OF MARKET PRICE 



A DISSERTATION 

SUBMITTED TO THE FACULTY OF THE GRADUATE SCHOOL OF ARTS 

AND LITERATURE IN CANDIDACY FOR THE 

DEGREE OF DOCTOR OF PHILOSOPHY 

(DEPARTMENT of political economy) 



BY 

ROBERT F. HOXIE 



CHICAGO 

THE UNIVERSITY OF CHICAGO PRESS 

1906 






c^d^ 



&A*S 



The University 
F 2 '09 



<3- 



THE JOURNAL 

OF 

POLITICAL ECONOMY 



JUNE—iqo6 



THE DEMAND AND SUPPLY CONCEPTS : AN INTRO- 
DUCTION TO THE STUDY OF MARKET PRICE 

The present work has been undertaken in the belief that the 
existing status of economic theory calls urgently for the restate- 
ment of economic concepts and for the revision of fundamental 
economic problems. In the world of business and industry most 
essential changes have been wrought out in the past half-century. 
The rapid subjugation of nature by social forces; the growing 
predominance of the pecuniary or acquisitive over industrial 
motivation ; the progressive concentration of pecuniary authority 
and discretion as illustrated in the development of monopolies and 
in the increasing directive power of small groups of financial 
agents ; the growing importance of the time element in economic 
activity resulting from the roundaboutness of the modern indus- 
trial process and a transition from money to credit economy 1 — 

1 The purposes of this introduction forbid more than this bare reference to 
the revolutionary forces in contemporary economic life. These forces and their 
implications have recently been treated at considerable length by writers of repute, 
and notably by Americans. The distinction between the pecuniary and industrial 
motives and the implications of this distinction are considered by Dr. Thorstein 
B. Veblen in his recently published Theory of Business Enterprise (Scribner's, 
1904). This work also contains a suggestive chapter on "The Use of Loan 
Credit in Modern Business," which is practically reprinted from the "Decennial 
Publications of the University of Chicago," First Series, Vol. IV, p. 31- The 
distinction between pecuniary and industrial is brought out also by Dr. Werner 
Sombart in Der moderne Capitalismus (Leipzig, 1902). The implications of the 
time element have been systematically considered by Dr. Frank A. Fetter in The 



2 JOURNAL OF POLITICAL ECONOMY 

these and other manifestations of economic development have, 
especially of late, altered in some of its fundamental aspects the 
material of economic speculation. 

In the world of science the half-century has wrought equally 
essential changes which seem also to require readjustment in the 
field of economic theory. The evolutionary point of view has 
become firmly established, and has revolutionized men's notions 
in regard to the essential nature of scientific problems and scien- 
tific method. Sciences under its influence no longer concern them- 
selves primarily with the normal, the typical, the abstract, but 
tend to recognize only the concrete and the actual; they are no 
longer content to ask what and how, but increasingly demand to 
know why; they are no longer satisfied to find answers to their 
queries in morphological classification and in mechanical equili- 
brium of present but abstract forces, but demand solutions of 
scientific problems in terms of the life-story of concrete material. 
In short, in obedience to' the evolutionary spirit, there has been a 
notable tendency in modern science to abandon abstract material 
for concrete; classification in terms of present form and function 
for classification in terms of genesis and process; static for 
dynamic problems ; mechanical solutions for solutions in terms of 
cumulative change. 2 

Principles of Economics (Century, 1904), and also in the following recent con- 
tributions to periodical literature : "Recent Discussions of the Capital Concept," 
Quarterly Journal of Economics, Vol. XV, p. 1 ; "The Next Decade of Economic 
Theory," Publications of the American Economic Association, Third Series, Vol. 
II, p. 236 ; "The Roundabout Process in the Interest Theory," Quarterly Journal of 
Economics, Vol. XVII, p. 163 ; "Relations between Rent and Interest," Publica- 
tions of the American Economic Association, Third Series, Vol. V, p. 176. To 
Bohm-Bawerk should be given credit for initiating the scientific discussion of the 
time element in economics. See his Positive Theory of Capital, Book V. Several 
writers have of late considered the monetary implications of the modern develop- 
ment of credit, but special recognition in this field should be accorded to Professor 
J. Laurence Laughlin. His main work in this connection is to be found in 
The Principles of Money (Scribner's, 1903), in the Final Report of the Monetary 
Commission of the Indianapolis Convention, 1898, and in a paper on "Credit" 
contributed to the Decennial Publications of the University of Chicago, First 
Series, Vol. IV, p. 1. 

2 The citation of specific authority in proof of these statements hardly seems 
to be required. The whole body of work in the field of biology under the Dar- 
winian impulse substantiates what is here said. 



THE DEMAND AND SUPPLY CONCEPTS 3 

To the influence of this dual revolution in fact and thought 
economics has been slow to respond. Economists indeed, almost 
en masse, have seemed to feel the need of theoretical readjustment, 
but, with a few notable exceptions, efforts in this direction have 
been relatively ineffective. The progressive revolution in the 
economic organization has been met in general bv theoretical 
repairs merely, such as are implied in perfunctory distinctions 
like that between private and social capital, in greater emphasis on 
the element of "friction" in connection with the "normal" com- 
petitive activity and results, in recognition of the more obvious 
monetary implications of the growing importance of credit. The 
revolution in scientific thought has in general produced in the 
field of economic reasoning nothing more serious than harmless 
diversions, such as are represented by emphasis on the relativity 
of economic percepts, erudite discussion of the evolution of ter- 
minology, and introductory essays on the growth of modern 
industry. In fact, the great body of generally accepted economic 
theory seems to have remained essentially unmodified by the 
recent progressive revolution both in science and economy. 

If proof and illustration of this statement are needed, they 
may be found in the current conception and solution of any typi- 
cal problem in the field of economic theory. Take, for example, 
the problem of wages. Whether the view of the classical English 
writers, or that of the Austrian school, or of the group of eclectic 
writers best represented by Alfred Marshall, be taken, the wage 
question is considered altogether as a static problem, its solution 
is undertaken solely by the method of equilibrium of forces, and 
the analysis of the conditions which determine wages shows a 
defective, and one might almost say an archaic, conception of the 
present-day economic situation. 

The slightest consideration seems sufficient to justify the last 
of these charges. In spite of the splendid development of 
monopoly conditions, and the widespread organization of em- 
ployers and laborers, the normal wage-rate is still taken to> be 
one fixed by free and individual competition. In face of the evi- 
dent pecuniary authority and discretion of the business under- 
taker, and the progressive concentration of this authority, indus- 



4 JOURNAL OF POLITICAL ECONOMY 

trial initiative and discretion are still supposed to reside in the 
laborer equally with the employer; where efficiency is supposed 
tO' constitute a condition determining wages, practically no- dis- 
tinction is made between efficiency which is industrial and that 
which is merely pecuniary; and, notwithstanding the universal 
recognition of the roundaboutness of the typical modern indus- 
trial process, orthodox 3 doctrine contains hardly the beginnings 
of an adequate consideration of the time element in relation to 
wages. In short, in the analysis of the conditions which govern 
the fixing of wages the essential and fundamental factors of mod- 
ern economy are very largely ignored. The economic organiza- 
tion which is taken as contemporary by these schools of thought 
is one which existed, or was supposed to> exist, in an earlier eco- 
nomic era. This is true not merely in relation to the wage ques- 
tion, but to economic problems generally. 

A somewhat more detailed consideration is necessary to show 
that the wage problem, in the view of orthodox economics, is 
static merely, and that it is solved solely by the method of equili- 
brium. If we analyze the wage discussions of these dominant 
schools of economic thought, we find that in the case of all of 
them the central conception is that of a normal wage ; this wage 
is not any definite or concrete or historical thing, but is admittedly 
an abstraction ; the problem as conceived is not what is this nor- 
mal wage, or how does it progressively vary, but what are the 
general and abstract forces that determine it; the solution of the 
problem is sought in the examination of conditions that are sup- 
posed normally to govern the strength of opposing forces; and 
finally the wage problem, so far as considered, is solved, when, 
the strength of opposing forces having been demonstrated, the 
abstract conditions of stable equilibrium have been determined. 

The essential truth of this analysis will be at once recognized 
if we sketch, with a few conventional strokes, the rough outlines 
of the actual wage doctrine held by these dominant economic 
schools. All three seek to> establish the universal law of wages; 
in other words, to show how wages in the abstract are deter- 

3 The term "orthodox" is here used as a convenient one to represent the 
ideas of any of the schools of thought mentioned above. 



THE DEMAND AND SUPPLY CONCEPTS 5 

mined ; all, in one way or another, subscribe to the doctrine that 
wages are determined by the operation of forces essentially 
described in the terms "utility" and "cost;" all examine the 
conditions and forces that normally underlie and determine mani- 
festations of utility and cost ; all find the normal wage to' be a 
resultant of stable equilibrium of the opposing forces underlying 
the utility and cost phenomena; and, though all discuss to some 
degree the variation of actual from normal wages, this variation 
is also 1 discussed in terms of the conditions that underlie these 
opposing forces. Evidently the differences between the adherents 
of these schools, which for half a generation have formed the 
backbone of economic controversy, have been merely disagree- 
ments as to the proper analysis and classification of the forces 
representing utility and cost, and as to the relative emphasis that 
should be placed on these determining forces. The classical 
economists emphasized cost, and classified the forces representing 
cost and utility as conditions of supply; the Austrians placed the 
greater emphasis on utility, and chiefly classified under the head- 
ing of demand; the eclectics abandon emphasis and strive to 
utilize both classifications. 

It is apparent that these differences do not touch the funda- 
mental conceptions of the nature of the problem and the method 
to be employed in its solution. The problem as conceived is static 
in its nature ; the method of solution is the method of equilibrium. 
Moreover, it is clear that the current tendency to abandon the 
crude hedonistic conception of economic motive, and to> recognize 
that man's economic action is, in part, habitual if not instinctive, 
altruistic and constrained, admirable as it may be, does not essen- 
tially alter this conception of problem or method ; nor is this altera- 
tion achieved by the tendency to a more ultimate analysis of the 
conditions that underlie utility and cost in social, institutional, or 
even in historical terms. In short, among the adherents of the 
present dominant schools of economic thought there is in the solu- 
tion of this problem no attempt to adopt the evolutionary stand- 
point. And this attitude in regard to the problem of wages is 
general and typical. 

In the examination of this typical economic problem, then, 



6 JOURNAL OF POLITICAL ECONOMY 

we find ample proof that contemporary economics ignores both 
the evolutionary point of view and the most essential results of 
recent economic development. In other words, we find that 
orthodox economists have devoted themselves exclusively to what 
might be called, in the broadest sense of the term, classification; 
that this classification has been exclusively in terms of present 
and non-evolutionary data, and that classification even in these 
terms has been altogether incomplete and defective. 

It seems clear, therefore, that the existing status of economic 
theory calls urgently for the restatement of economic concepts 
and for the revision of fundamental economic problems. But we 
have now to ask what is the nature of the restatement and revi- 
sion which are needed. Quite evidently it is most essential that 
the facts of modern business and industry should be correctly 
apprehended. Evidently economics, dealing, as it does, with a 
developing material, cannot ignore its dynamic problems and the 
method of genesis and process. It must strive to become an evo- 
lutionary science. Finally, it is evident that if economics is to deal 
with static problems by the method of equilibrium — in other 
words, in the broadest sense of the term to classify its material in 
terms of present form and function — its classification must be 
true to the modern economic situation. The only question at all 
in doubt is this : Must economics, in response to the modern scien- 
tific spirit, cease to' concern itself with classification on the basis 
of present form and function, and with the problems of social 
statics? In other words, must it abandon its present aim and 
method ? 

The answer to this question should undoubtedly be in the 
negative. The contrary notion seems to be based on the analogy 
between economics and the biological sciences. But does the 
acceptance of this analogy really require an affirmative answer to 
the question just stated? In reality, it does not. Indeed, when 
carefully considered, it seems not only to justify, but positively to 
emphasize, the need for continuous activity in the field of eco- 
nomic statics. That the static problems cannot be ignored is 
shown by the fact that those sciences which are most completely 
dominated by the evolutionary ideal have not succeeded in freeing 



THE DEMAND AND SUPPLY CONCEPTS J 

themselves entirely from the problem of classification in terms of 
existing data. 4 This fact results from the nature of scientific 
investigation, which, before it can ask the question why in evolu- 
tionary terms, must, provisionally at least, answer the question 
what. And whatever may be the ultimate relation of these prob- 
lems, 5 practically their solutions constitute two relatively distinct 
scientific aims. In the very nature of things, that is to say, there 

4 In a paper on "The Empirical Method of Economic Instruction," published 
in the Journal of Political Economy, Vol. IX, No. 4 (September, 1901), on pp. 486, 
487, the writer attempted to characterize the biological sciences in these words : 
"We have seen that these sciences aim in general to present systematic accounts 
in causal terms of groups of facts whose relationships are subject to cumulative 
change. Now, the changes of relationships which these sciences have to consider 
are of two general kinds: (1) within the group there is a definite, regularly 
repeated process of change which may be termed the life-process ; and (2) the 
group itself is undergoing a definite progressive change, in general, from a simple 
to a more complex organism or organization. Such being the case, these sciences, 
in furtherance of the general scientific aim, have evidently two main objects. 
These are, first, to give systematic and causal accounts of the organisms or 
organizations as they are, and, secondly, to give systematic and causal accounts of 
the processes of development of these organisms or organizations. 

"The attainment of the first of these ends involves three logically distinct 
lines of study: (1) a study of the forms of the organism or organization; (2) a 
study of the life-processes going on within the organism or organization; and (3) 
classifications of these forms and processes. The attainment of the second aim 
involves the same lines of study, historically and comparatively, with special 
reference to the forces at work tending to modify structure of organism or 
organization and the processes going on within. This analysis of the scientific 
aim in connection with the material involved gives us the logical division of the 
sciences belonging to the [organic group]. That the analysis is essentially correct 
is evidenced by the fact that these divisions do in fact correspond to the essential 
divisions of complete organic sciences. Thus botany comprehends, first, morphol- 
ogy (including histology), physiology, and systematic botany, or study of form 
and process leading to classification, and, secondly, a number of lines of study 
intended to lead to a genetic account of plant life. This second group of studies 
is better worked out in zoology, where we have phylogeny, a study of the origin of 
species ; ontogeny, a study of the origin of individuals ; embryology, paleontology, 
studies of the progressive development of individuals, etc." 

5 Of course, in a sense, the second of these problems is included in the first, 
since the organism, as it is, is a product of the past development, and can be 
completely understood only in the light of this development. But assuming the 
present situation as it is — i. e., simply as having become — then we may, for 
convenience, without scientific inaccuracy, separate its study into an account of the 
life-processes now going on within the organism in terms of causes now operating, 
and a causal account of the genesis of this organism. 



8 JOURNAL OF POLITICAL ECONOMY 

must be in economic study these two classes of problems — the 
static and dynamic, each with its appropriate method. 

Economics, then, in failing to adopt the evolutionary view- 
point, has not gone fundamentally wrong. It has merely lagged 
behind the biological sciences. The reason for this is plain and 
impersonal. It is that, compared with these sciences, the prob- 
lems of classification and of the life-process in economics are 
exceedingly complex and shifting. This very reason, however, 
emphasizes not only the necessity for continued and vigorous 
prosecution of the static economic problems, but also the impera- 
tive need of progressive restatement and resolution of these prob- 
lems, if they are intelligently to present and interpret the con- 
temporaneous facts oi everyday life. Intelligent solution of many 
of these static problems we have not at present, hence the present 
need of theoretical revision. 

It would be an error, however, to suppose that the immediate 
need of the science is merely reclassification in terms of present 
data and review of the present life-process in the economic field. 
The truth is that, for the healthy growth of economics, the static 
and dynamic problems must be developed contemporaneously; 
for, as we have endeavored to show, the question why must wait 
upon the answer to the question what. But, on the other hand, 
it is undoubtedly true that a potent reason for the inadequate and 
archaic view which present-day economics prevailingly presents 
of the facts of modern economy results very largely from a failure 
to attempt a solution of the problems of economic evolution. 

What we really need, then, in economics is both fundamental 
revision of old static concepts and problems, and an advance on 
new and dynamic ones. The imperative character of the latter 
work seems almost self-evident. In the present state of eco- 
nomics, however, it does not seem altogether unreasonable to 
regard revision of static problems as equally imperative. It is 
only necessary that in carrying on this labor we should not naively 
imagine, as economists have been wont to do, that we are engaged 
in the only, or in the ultimate, work of the science. We should 
never forget that the ultimate aim of organic science in this day 



THE DEMAND AND SUPPLY CONCEPTS 9 

and age is to interpret life, not in the abstract, but in the concrete, 
and not in terms of being, but in terms of becoming. 

The foregoing considerations perhaps sufficiently justify at 
the present time a somewhat detailed and technical discussion of 
the problem of market-price determination. This problem is 
obviously the kernel of static economic theory. Any attempt, 
therefore, at its re-solution more in harmony with the facts of the 
actual pecuniary and industrial life about us cannot be utterly 
devoid of worth in connection with that general revision of static 
economic doctrine which seems so desirable. There is, moreover, 
a special reason for attacking this problem boldly and vigorously. 
Nowhere else in economic theory perhaps has controversy raged 
so continuously and fiercely. As a result, discussion of this most 
practical and primary problem has tended to become doctrinaire 
and partisan. The significance of the rapid and essential change 
in modern economy has been overlooked, and the intelligent study 
of secondary theoretical problems delayed and hampered. There 
seems, then, to be a real need for the study of market price frankly 
as a static problem and frankly by the method of equilibrium; 
that is to say, study simply and solely of the process by which 
price in the abstract is fixed in the market; a study, moreover, 
which shall attempt to include all the essential forces that con- 
tribute to price determination under the actual conditions of 
present-day economy. Such a study the following work is 
intended to be. 

Conceived in this manner, market price appears as a resultant 
of the opposing forces, demand and supply. And, thus conceived, 
the problem naturally subdivides itself into a number of distinct, 
but organically related, inquiries. First, it seems necessary to 
inquire into the more objective nature of the demand and supply 
concepts; that is, to establish the general or universal character- 
istics of these phenomena under modern economic conditions. 
But it is evident that the demand and supply which actually deter- 
mine price are not general but specific phenomena operating in a 
market; and when this is clearly apprehended, the suspicion is 
aroused that the specific character of demand and supply may 



io JOURNAL OF POLITICAL ECONOMY 

vary in different markets. We find ourselves then, secondly, com- 
mitted to a study of the general and specific nature of markets, 
and the specific characteristics of market demand and supply. 
The character of demand and supply having- been thus deter- 
mined, we naturally proceed, thirdly, to the objective study of the 
market process; that is, to the actual process by which, under 
various conditions, demand and supply (if at all) in the first 
instance determine price. The consideration of these three topics 
constitutes what might be termed the objective or descriptive 
study of market price, and simply prepares the way for an exam- 
ination of the nature and operation of the forces which underlie 
and determine price-fixing. This work would naturally begin 
with the immediate subjective explanation of the demand and 
supply phenomena and the objective market process as it has 
been shown to exist; that is to say, a study of what might be 
termed the subjective mechanics of the price problem. There 
would then follow, naturally, a study of the ultimate determinants 
of demand, a study of the ultimate determinants of supply, and a 
final summing up of the essential and ultimate determinants of 
market price. 

The discussion which here follows is devoted entirely to the 
consideration of the first of the logical market-price inquiries 
named above — that is to say, to an inquiry concerning the gen- 
eral characteristics of the demand and supply concepts. In this 
discussion, the aim is to build up an adequate schematic repre- 
sentation of demand and supply in their general character of 
market-price determinants, and in conformity with the actual, but 
more general conditions of modern economy. That the current 
treatment of the matter is. on the whole, unsatisfactory seems the 
result of two main causes — failure to view demand and supply 
distinctly and consistently as market-price determinants, and, 
secondly, failure to realize that the essential characteristics of 
demand and supply have possibly been altered and augmented as 
modern economy has developed. In our work, therefore, of 
schematic construction the main specific tasks will be to assemble 
in orderly manner the demand and supply characteristics current 
in economic thought, where necessarv, to- restate these charac- 



THE DEMAND AND SUPPLY CONCEPTS 1 1 

teristics carefully from the view-point of the price problem, and 
to discuss the effect upon the demand and supply concepts of the 
essential development of recent economy. This work will be 
with design both impersonal and non-historical. In harmony 
with what was said earlier in this introduction, it is believed by 
the writer that the work here to be done cannot be materially 
furthered by the erudite discussion of the evolution in economic 
literature of the demand and supply concepts. 

I 

Extreme difficulty is inherent in any attempt to abstract from 
the shifting mass of material and immaterial happenings of every- 
day life, and to characterize clearly, distinct classes of economic 
phenomena. This difficulty is emphasized, in the case of demand 
and supply, by special ambiguities connected with the ordinary 
use of the terms. It will be well, therefore, at the outset of this 
study, in order to avoid unnecessary difficulties, to remove as far 
as possible the ambiguities by making clear in what sense these 
terms are to be used. It is possible to distinguish in economic 
discussion two quite different uses of the terms "demand" and 
"supply." In one case, these terms are employed in a general 
philosophical sense to indicate the essential nature of demand 
and supply as such. An example of this usage is where it is said 
that demand and supply are identical — two- sides of the same 
shield — in order to indicate that goods which are offered for 
other goods are at the same time the objects of offer in terms of 
other goods. Or, where similar language is used, to> indicate that 
in the exchange of two commodities the buyer of either good is 
at the same time the seller of the other, and vice versa. In the 
other case, these terms are employed, in a much narrower and 
more specific way, to indicate the demand for and supply of any 
single commodity, as when it is said, for example, that at a given 
price the demand for a certain commodity exceeds its supply. 

These two uses of demand and supply should not be confused. 
In which of these senses the terms should be employed at any 
time obviously depends upon the nature of the problem in hand. 
In the present instance the main objective is the study of the con- 



12 JOURNAL OF POLITICAL ECONOMY 

ditions which determine market price in the specific but abstract 
case. It is, in the latter sense, therefore, as distinct market phe- 
nomena causally related to the price of a single definite good that 
the terms "demand" and "supply" are to be employed in this 
thesis. To determine the general characteristics of demand and 
supply, thus definitely conceived, is our specific problem. In order 
to judge of the truth of what follows, this fact must be kept care- 
fully in mind. 

Furthermore, conceived thus as specific market phenomena, 
demand and supply may be either total or individual. To avoid 
possible confusion arising out of the frequent practical necessity, 
in the course of the discussion, for reasoning in terms of both 
these aspects of demand and supply, it will be well here to state 
our conception of their mutual relations. This will involve a 
provisional and rough description of the market. Provisionally, 
then, we may describe the market where the price of any com- 
modity is fixed, as composed of an indefinite number of com- 
petitively related individuals belonging to two* classes — those 
who are engaged, or are supposed to be engaged, in offering the 
good in question for sale, and those who are engaged, or are 
supposed to be engaged, in making offers to purchase the good. 
For our present purposes it is not necessary to decide whether all 
the individuals offering and making offers in such a competitive 
group, or whether only certain of them, make up the actual market 
group. In either case, each of the individuals belonging to the 
first class, and who is in the market, contributes a supply of the 
goods, and the total market supply is evidently the sum of the 
supplies offered by all the individuals in the market. In the 
same manner we may describe the total market demand for the 
commodity as the sum of the demands of all the individuals in the 
market. In short, total market demand and total market supply 
are made up of individual market demands and supplies. It fol- 
lows that the laws which underlie and determine individual 
demand and supply in any market also underlie and determine 
total demand and supply in the same market. No error, then, 
will be involved in reasoning from the laws of individual demand 



THE DEMAND AND SUPPLY CONCEPTS 13 

and supply to total demand and supply. This we shall have 
frequent occasion to do. 6 

Having now disposed as far as possible of the ambiguities 
with which our problem is beset, we may proceed, without further 
delay, to the determination of the general character of the market 
demand and supply. 

It is to be noted then, first, that demand and supply, as price 
determinants, are distinct and mutually exclusive phenomena. 
This statement is, to all intents and purposes, axiomatic. But it 
seems necessary, not only to' state, but to emphasize, this self- 
evident fact, because of the quite general assumption in economic 
literature to the contrary. This assumption obviously results 
from the failure to differentiate clearly demand and supply as 
specific price determinants from these phenomena in the more 
general sense. When this differentiation is made, it is at once 
clear that to assert the identity of demand and supply as market 
phenomena is practically to deny the existence of the price prob- 
lem, since it evidently constitutes a denial of the whole process of 
market adjustment from which price is supposed to' emerge. 
Clearly, then, as determinants of price of a single but abstract 
market commodity, demand and supply must be conceived as 
distinct and mutually exclusive. 

But, secondly, though distinct and exclusive phenomena, 
demand and supply in any specific case stand in reciprocal rela- 
tion to the same commodity, and are to be expressed in terms of 
the commodity concerned. The main proposition which under- 
lies all demand and supply discussion from our present viewpoint 
is: The market price of a commodity is determined by the 
demand and supply of it. It is a subtle reintroduction of the more 
general conception of demand and supply, and therefore of the 
elements of ambiguity and confusion, to' express the supply of a 
good as so many units of it, and the demand for it as so' many 
units of some second commodity. We may not be willing to sub- 
scribe to 1 the proposition that price is fixed when the quantity 
demanded is equal to the quantity supplied. Yet we all feel that 

8 The term "market" will frequently be used in the abstract and generic, 
rather than in the specific, sense. 



14 JOURNAL OF POLITICAL ECONOMY 

this orthodox proposition is worthy of consideration. But the 
statement would be quite meaningless were the quantities 
referred to not quantities of the same good. Consider the 
absurdity of the statement, in a market where bushels of apples 
are exchanging for hundred-weights of coal, that the price of 
apples is fixed where the quantity of apples is equal to the quan- 
tity of coal. Evidently, if demand and supply are forces whose 
relationship determines price in the market, they must be strictly 
comparable. This they cannot be unless they are qualitatively 
identical. 

The principle here contended for is not really violated when 
demand and supply are immediately expressed in terms of differ- 
ent commodities, provided an assumption is made by means of 
which the diverse expressions may be reduced to terms of the 
same character. This is illustrated when, in current discussion, 
supply is expressed in bushels, and demand in dollars at a certain 
price per bushel — when, for example, the supply is taken as ten 
bushels, and the demand is expressed as five dollars on the 
assumption of a one dollar price per bushel. This evidently is but 
a roundabout way of saying that the supply is ten bushels, and the 
demand under the conditions assumed is five bushels. In the 
interest of clearness, however, such methods of expression should 
give place to the direct statement of demand and supply in terms 
of the commodity whose price is to be determined. 

Thirdly, though demand and supply are necessarily expressed 
in terms of quantity of what is usually a physical commodity, they 
are not to be regarded as physical phenomena merely. This is 
quite evident in the case of demand; for, as demand must be 
expressed in terms of the good concerned, to make it physical 
would be to make the commodity constitute its own demand. On 
the other hand, demand is not merely psychological — not merely 
desire. In the end, physical or objective goods must be offered in 
payment for the commodity demanded. There is no real demand, 
no effective price-determining force, in offers that are not backed, 
or believed to be backed, by goods — in offers that represent desire 
merely. What, then, is the relationship of the subjective and the 



THE DEMAND AND SUPPLY CONCEPTS 15 

objective elements in demand? Which is the essential and deter- 
mining element? 

A little consideration shows that it is not the physical or 
objective element. Grant that demand cannot be effective with- 
out the offer or the willingness to offer for the good in question 
some other commodity or commodities in the market. The ques- 
tion at once arises: What other commodity? Evidently not all 
other commodities in the market will stand in this relation to any 
one good. And equally evident is it that mere physical or inher- 
ent characteristics do not mark off those goods which are from 
those which are not offered for any given commodity. We are 
driven, then, to assume that the determining quality of demand 
in any specific case is not physical, but psychological. That which 
determines that one good shall be offered in exchange for another 
is in fact the psychic attitude, the state of desire, of the putative 
owners or possessors of the so-called "demanding" goods — the 
desire which they have, on the one hand, for the good whose 
demand is in question, coupled with the desire which they have 
for the goods in terms of which they must make offer and 
payment. 

Desire, then, is the essential element of demand : the physical 
is at best merely a limiting factor. And even this is perhaps lay- 
ing too much stress upon the physical element. For those who 
will observe the market must recognize that the effective demand 
which may be exerted for a good by those who are bidding for it 
is not limited by the physical goods over which they can assert 
the title of ownership, or which are in their possession. So> long 
as any bidders can convince suppliers of the good in question 
that they will be able at the end of an acceptable period to produce 
acceptable means of payment, their bids constitute demand, 
though they may not, at the time, control a single physical unit of 
the commodity or commodities in which payment is to be made. 
It is not, then, the actual amount of physical or objective goods 
that can be given for a commodity that limits the demand for it in 
the market, but the amount which bidders are able to convince 
prospective sellers of the commodity that they are willing and 
able to pay for it. Nor is this willingness and ability which limit 



1 6 JOURNAL OF POLITICAL ECONOMY 

demand necessarily measured by the actual bids of prospective 
purchasers in the market. It cannot be too> strongly emphasized 
that it is the imputed willingness and ability to take and pay for 
a commodity that limits the demand for it. The generally 
accredited rumor that an astute financier is secretly bidding, or 
about to bid, for ten thousand shares of a certain stock, in order 
to reap the benefit of a rumored increase in earning power which 
they represent, will often just as effectively increase the demand 
and raise the price of this stock as though he actually stood in the 
market place and evidenced his willingness and ability by actual 
bids. 

Demand for a good, then, is a compound of elements which 
are partly subjective and partly objective. It is, on the one hand, 
a desire or willingness, real or imputed, on the part of prospective 
purchasers to take the good from the market, and, on the other 
hand, an ability, real or imputed, of these prospective purchasers 
to make to prospective sellers the necessary and satisfactory objec- 
tive payment for the good in question. The most essential 
element in all this, however, is undoubtedly the psychic. 

Turning now to supply, it appears at first blush that the 
physical or objective constitutes its more essential element. 
Well-established usage seems to 1 sanction the statement that sup- 
ply of a commodity consists at any time in the amount of it which 
is in the market. But does the acceptance of this statement really 
stamp supply as essentially an objective or physical phenomenon? 
A little consideration shows that it does not; for to> accept this 
conclusion would evidently be to assume, contrary to< the fact, that 
the state of being in the market is a purely objective or physical 
matter. Experience contradicts this assumption. A purely cur- 
sory observation of the market process shows that it is not the 
physical or objective shifting of goods that appears to cause price 
variation on account of changes in supply. It has been demon- 
strated on innumerable occasions that without the moving of a 
wheel the supply of a good in a given market may be multiplied, 
or, on the other hand, practically annihilated. Evidently, then, it 
is not the mere objective presence or absence of a good that 
determines whether or not it is to be reckoned as supply in any 



THE DEMAND AND SUPPLY CONCEPTS 17 

market, but it is the disposition which those who control the good 
are willing and able to make of it. The essential fact is the 
willingness and ability of men to offer the good for sale. 

Nor in the actual market can it be said that the physical or 
objective situation, ownership or even existence of the good, sets 
a positive and inflexible limit on the willingness and ability of 
men to offer it in the market in such a way as to constitute supply 
at any time. Whatever amount of a good prospective sellers in a 
market can convince purchasers that they are willing and able to 
deliver at an acceptable time, to be specified in the contract of sale, 
constitutes supply of that good, it matters not whether the good 
is at the time of offer actually within the market area, or even in 
existence, or, if in existence, by whom the present title of owner- 
ship is held. Nor is the supply limited by the actual offers which 
are considered to be bona fide by prospective purchasers. As in 
the case of demand, the amount of supply is a putative matter. 
Any means which is effective in causing prospective purchasers 
to impute to prospective sellers the present power and willingness 
to offer the goods in the market to an additional extent is also 
effective in increasing market supply. 

Confidence, then, in the willingness and ability of prospective 
imputed sellers to enter into and to perform contracts, rather than 
any physical condition whatever, is evidently the limiting factor 
in supply. In strict analogy with demand, supply is in its essence 
preponderatingly psychological. It is, on the one hand, a desire 
or willingness, real or imputed, on the part of prospective pur- 
chasers to bring forward a good in the market, and, on the other 
hand, an ability, real or imputed, of the prospective sellers to 
make to prospective purchasers the necessary and satisfactory 
guarantee of delivery of the good in question. In short, the 
amount of supply is the amount of a good which prospective 
sellers are imputed to* be willing and able to offer in a manner 
considered to be bona fide by prospective purchasers. 

The forces which influence and determine both supply and 
demand for a good in any market, then, are to be found in the 
putative psychological attitude and proprietary condition of the 



18 JOURNAL OF POLITICAL ECONOMY 

individuals who are supposed to be the prospective sellers and 
purchasers in the market, of the good in question. 7 

The fourth important general characteristic of market demand 
and supply refers to the time at which these phenomena in any 
specific case of price-fixing may be said to exist. It has become 
common for economic writers to refer to demand and supply as 
the amounts, respectively, of a good which are taken or offered in 
the market at a specified price. The inference frequently, and 
perhaps unconsciously, drawn from this statement is that the 
extent of demand and supply waits upon, or is determined subse- 

7 The failure to understand the partly psychological character of supply, 
together with a failure to recognize the importance of the fact that goods in the 
market are wanted largely for future delivery, has lain at the foundation of a 
great part of the value controversy of recent years, which has consequently pre- 
sented the edifying spectacle of a contest in which neither compromise nor the 
victory of either party could result in establishing the truth. The full effects of 
the time element on supply, as represented in contracts for future delivery and 
future payment, will be discussed later. This need not, however, prevent at this 
point explanation and proof which seems desirable of the statement just made. 

The tap-root of the controversy between the Austrian and the classical 
economists seems to have been their diverse notions of the nature of supply. 
The Austrians seemed to tend persistently to regard supply as stock in hand. The 
classical economists, with equal persistence, tended always to identify it with 
current technical production. The "stock in hand" idea of supply seems to be 
that which caused the Austrians to neglect the analysis of the conditions of pro- 
duction, while the technical-production thesis appears to be the parent of the 
notion, so long a fundamental assumption of the classical school, that market 
supply is under the governance of the identical cost of production of the goods 
which at any moment are in process of making. 

To reduce these general assumptions of identity to palpable absurdities, how- 
ever, it is only necessary to enumerate the conditions which their universality 
would imply. In order that supply at all times should correspond exactly to stock 
in hand, it would be necessary to assume the non-existence in the market of all 
bargains for future delivery of goods, and also to deny the possibility of even 
temporarily withholding produced goods from the market. On the other hand, 
the assumption of identity at all times of market supply and current technical 
production would require these assumptions: (i) the impossibility of withholding 
technically produced goods from the market, and (2) the impossibility of the 
appearance of a good as supply more than once in any market, in which case the 
great and rapid fluctuations in supply which are characteristic of modern markets 
would have to be accounted for by the assumption of perfect flexibility of technical 
production both as to time and amount, i. e., the ability of the producer to 
increase or decrease his output at will and without delay. Manifestly the with- 
holding and the remarketing of goods are acts always possible except in the case 



THE DEMAND AND SUPPLY CONCEPTS 19 

quent to, the fixing of the price. The mere definite statement of 
this inference stamps it, of course, as erroneous. It involves the 
fatal error of looking- at the demand and supply of an article as 
determined by the price at which it actually sells — an error fatal, 
because it directly contradicts the fundamental assumption of all 
price-reasoning, that it is the demand and supply which determine 
the market rate of exchange, thus involving us logically in a 
vicious circle. The only premise consistent with our fundamental 
assumption is that the demand and supply which stand in causal 
relation to price are phenomena which exist precedent to the act 
of purchase and sale. This premise must be unequivocally upheld 

of very perishable commodities, and the possibility of perfect flexibility of produc- 
tion exists only in connection with immaterial goods — personal services — and 
in connection with these only in a limited and equivocal way. With the possible 
exception, then, of very perishable goods, and of those — if there be any such — 
into whose production the time element does not enter, and the amount of 
whose production is under perfect control, current market supply cannot be 
assumed to coincide with either stock in hand or current technical production. 

It was probably recognition of the untenability of these assumptions in the 
grosser form that caused them to be presented in a more refined manner as asser- 
tions, on the one hand, that market supply is drawn wholly from stock in hand, 
and, on the other, that it is drawn wholly from current technical production. But 
in this more refined form they are no less erroneous. Were market demand deter- 
mined wholly by those prospective purchasers willing and able to take goods for 
immediate delivery only — in other words, were all bargains for future delivery 
barred from the market — supply, at any time except in the doubtful cases where 
production might be assumed to be perfectly flexible, would necessarily be drawn 
wholly from stock in hand. But the market demand at any time does not come 
wholly from those who require immediate delivery of goods. In fact, especially in 
the case of relatively permanent goods — such, for example, as railway supplies 
and building material — current market bargains very largely take the form of 
contracts for future delivery. So far as this is the case, manifestly market supply 
at any time — i. e., that supply which helps to determine market price at any 
time — must and does transcend current stock in hand. 

Equally obvious is it, however, that where bargains are made for immediate 
delivery — for example, in the case of the great majority of the bargains in con- 
nection with goods for immediate consumption — barring the assumption of per- 
fect flexibility of production, supply cannot possibly be drawn from goods in 
process of production. In such cases supply is necessarily wholly drawn from 
stock in hand. Unless, therefore, we refuse to consider the market as it actually is, 
preferring an abstraction whose unreal simplicity bears little relation to the actual, 
we must admit that market supply is neither what it was conceived to be by the 
Austrian school or by the classical economists. The fact is that both schools erred 
in fixing their attention exclusively upon one simple phase of the complex phe- 
nomenon supply. Each saw a half-truth, from which each drew conclusions that 
were wholly false. 



20 JOURNAL OF POLITICAL ECONOMY 

so long as we have discovered no conclusive evidence against the 
price potency of demand and supply. Fortunately, we are not 
dependent entirely upon indirect proof of the assumption that 
demand and supply which are causally related to price in any case 
exist prior to the specific act of purchase and sale concerned. 
Universal market experience corroborates this assumption. For 
the fact must be recognized by all that the act of purchase and 
sale, under ordinary circumstances, actually annihilates a certain 
more or less definite quantum of supply and demand through the 
attainment of the ends toward which men strive in market 
bidding. We seem justified, then, in assuming that demand and 
supply, which determine price in any particular sale, attain their 
final proportions previous to the specific market act concerned. 
How long previous to this act demand and supply are definitely 
determined cannot be discussed apart from a careful analysis of 
the market process under different typical circumstances, and 
must therefore be left for later discussion. 

Acquiescence in the conclusion just reached involves a denial 
of the assumption, more or less current, that demand and supply 
can be represented in relation to a given commodity, each as a 
single definite quantity of the good. Evidently, so long as the 
price is not determined, prospective purchasers and sellers will not 
come into the market at any time prepared merely to take or 
bring forward a definite quantity of the good in question on the 
arbitrary assumption of a single definite price. On the contrary, 
both introspection and observation indicate that prospective 
dealers enter the market committed to no> definite single act, but 
with more or less well-defined schedules in mind of amounts of 
the good in question which they are prepared to offer or take at 
various suppositional prices. Nor is it possible price variation 
alone which conditions the market activity. Aside from the mat- 
ter of price, there are evidently a number of what may be termed 
essential market factors or terms, variation in any o>f which will 
affect the action to be taken by market bidders. 

It should be clear, then, that demand and supply, considered 
as precedent to the market act, are phenomena which are neces- 
sarily hypothetical or conditional ; and, as there must always be a 
plurality of hypothetical market terms or variants, neither demand 



THE DEMAND AND SUPPLY CONCEPTS 21 

nor supply can be adequately expressed except as a series of 
hypothetical amounts correlated with a series of hypothetical con- 
ditions. It follows that a complete expression of either of these 
phenomena in any particular case would involve a correlation of 
amounts which prospective bidders are willing and able, or are 
imputed to be willing" and able, to offer or take of the commodity 
in question, with all the essential, hypothetical, general conditions 
of a market bargain ; that is to say, would involve as many items 
as there are possible combinations of all the essential, hypothetical, 
general, market-bargain conditions. In order, then, to carry for- 
ward our discussion of general demand and supply characteristics, 
it is necessary to inquire what are the general or typical essential 
market-bargain factors or conditions which determine imme- 
diately the action of prospective buyers and sellers, and, having 
discovered these, to determine their relation severally and gener- 
ally to bidding in the market. 

Proceeding thus, it is to be noted that not all the hypothetical 
variants which determine the action of bidders in the market can 
properly be considered as essential, general market-bargain con- 
ditions. We must distinguish carefully the general terms in 
which the offers in the market are made — that is, the conditions 
which determine the general character of prospective market bar- 
gains — from the causes which, on the supposition of a definite 
bargain character, determine the magnitude of these terms. To 
give a specific and simple example : In the case where a certain 
price is offered for a certain quantity of a good to be determined 
and paid for at a certain time, we must carefully distinguish the 
price, quantity, and time factors from the subjective and objective 
conditions represented by the personal wants and habits of the 
bidder, and the quantity of the good in the market. The former 
represent general market-bargain conditions, hypothetical corre- 
lations of which express demand and supply, while the latter are 
conditions which must be taken into account in attempting to 
explain the extent of demand and supply as thus actually 
expressed. 

What, then, are the essential market-bargain conditions or 
terms, correlative variations of which express the demand and 
supply of any given commodity ? In answering this question, we 



22 JOURNAL OF POLITICAL ECONOMY 

have the advantage of the sure foundation of empiricism. Actual 
observation seems to show that the essential terms which are con- 
sidered in the typical market bargain are : ( i ) the grade or 
quality of the commodity in question; (2) the amount or number 
of definitely specified units of the good; (3) the price to be paid; 

(4) the time of delivery and payment; (5) the kind or character 
of good in which payment is to be made; and (6) the degree of 
risk of non-payment or delivery involved. 

A more careful examination of these six terms seems to throw 
doubt upon the validity of the inclusion or at least the inde- 
pendent inclusion of three of them. The grade or quality would 
seem to be too nearly the very essence of a good to be regarded as 
one of its variable attributes. It appears best, therefore, to> define 
commodity or good as an individual in a class of economic articles, 
all of which are of the same quality ; that is, to make every grade 
of article in connection with which market bidding takes place a 
distinct good or commodity. This rules out the first of the 
assumed market-bargain terms. Further, the kind or character 
of the good in which payment is to be made would seem to be a 
component element of price. Price is not merely a mathematical 
or numerical entity, but is in every case a numerical expression 
concerning a definite thing. We should assume, then, that the 
single expression "price" includes the terms numbered (3) and 

(5) above. The degree of risk also< appears capable of being 
regarded either as something which is expressed through price, or 
as one of the causal elements quite outside the essential terms of 
the market bargain. At least, it may be said that the degree of 
risk does not enter into the specified terms of the bargain, and is 
always considered by bidders in determining prices at which they 
are willing to' bid. These considerations seem of sufficient weight 
to cause it to be thrown out of the list of essential market-bargain 
terms. 

There remain, then, three distinct market factors, the possible 
combinations of whose correlative variations fully express market 
demand and supply. It remains to> give specific expression to 
these phenomena in terms of the three surviving factors. The 
difficulty of the task makes it expedient to attack it in the simplest 
manner possible. We shall, therefore, express demand and supply 



THE DEMAND AND SUPPLY CONCEPTS 23 

first in terms of two of these factors, and then add to these 
expressions whatever complexity results from the inclusion of the 
third and final term. 

Fifthly, then, we may say that, other things remaining the 
same — the time element being disregarded — the extent of the 
demand or supply of any good is the resultant of a correlation of 
various quantities of it with various hypothetical prices. We have 
already said that observation and introspection furnish ample 
proof of this statement. It is true that there are circumstances 
under which individuals enter the market apparently definitely 
committed to the purchase or sale of a fixed quantity of a com- 
modity at a fixed price. But it is probable that even in such cases 
the majority of individuals are prepared, more or less consciously, 
to vary the quantity and price, if circumstances make it necessary 
to do so, in order that they may effect a trade. For example, the 
purchaser, though he may have entered the market practically 
committed to* the acquisition of a certain definite amount of the 
good in question at a definite price, will often purchase a less 
amount of the good, if he finds that his price estimate is too low, 
rather than retire from the market altogether without the good in 
question ; and he will frequently increase the quantity which he is 
willing to take as soon as he finds that it can be obtained at a less 
price per unit than he had anticipated. And the opposite is true 
for the seller of the good. The conventional two for ten cents and 
three for a quarter illustrates the principle. But, under many 
circumstances, the keen trader does wait until he has entered the 
market to correlate amounts and prices of the good in which he 
expects to deal. He has in mind, before his appearance as bidder, 
a definite schedule of varying amounts of the good in question 
which he is willing and able, or which he proposes to convince 
others that he is willing and able, to purchase or sell at varying 
prices. Whether or not, however, these schedules are perfectly 
definite, and whether or not they are worked out before the entry 
of the individual into the market, does not affect essentially the 
general character of demand and supply. The essential fact is 
that in any case more or less definite hypothetical commodity- 
price schedules exist in the minds of individuals previous to' the 
act of purchase and sale. 



24 



JOURNAL OF POLITICAL ECONOMY 



We may therefore assume that, leaving aside variation in the 
time element, the total demand or supply of a commodity in any 
market may be represented by one combined schedule of correlated 
amounts and prices. In short, abstracting from the time element 
the demand for a commodity is to be represented by a schedule of 
the varying amounts of the good which prospective purchasers are 
willing and able, or are imputed to be willing and able, to take at 
varying hypothetical prices, and the supply by a schedule of the 
varying amounts which prospective sellers are willing and able, or 
are imputed to be willing and able, to offer at varying, though not 
necessarily corresponding, hypothetical prices. 

In illustration of these statements we may construct the fol- 
lowing demand-and-supply schedules and curves for commodity 
x, noting that these schedules and curves, while in general repre- 
sentative of all commodities, are constructed without reference to 
the time element, and therefore must not be taken as the complete 
and final representation of demand and supply. 8 



DEMAND SCHEDULE 



Hypothetical Price 

\y 

2y 

3y 
Ay 
sy 

by 

Demand Curve 

y 



Hypothetical Price 



Units of Commix 
Hypotbetically to be ' 


ity 
"aken 


IO.OOO X 




7,000 X 




5,000 X 




3.500 X 
2,500 X 
2,000 X 





b b b b b b b b b 

8 000 & 00000 
000000000 

Units of Commodity 

8 It is, of course, to be understood that these schedules represent only por- 
tions or segments of possible demand and supply considered with reference t» 
quantity and price. 



THE DEMAND AND SUPPLY CONCEPTS 



25 



SUPPLY SCHEDULE 



Hypothetical Price' 
ly 

2y 

iy 
Ay 
sy 

by 

Supply Curve 

y 



Hypothetical Price 



Units of Commodity 
Hypothetically to be Disposed of 

2,000 X 

2,500 X 

3.500 X 

5,000 X 
7,000 X 

10,000 X 



1 1 1 r 



- M U *> Ifl O^l 00O O 



OOOOO 
OOOOO 
OOOOO 



o o 
o o 
o o 



Units of Commodity 



It remains now to attempt an expression of the market demand 
and supply of a commodity in terms of the three distinct market- 
bargain factors — quantity, price, and time. This attempt will 
constitute the second part of our discussion concerning the general 

characteristics of these phenomena. 

1 

II 

Hitherto we have been engaged in the task of sifting from 
the rather heterogeneous mass of current thought, in regard 
to demand and supply, characteristics which admit of being 
arranged in a consistent series'. We have now the far more diffi- 
cult task of discussing the effect upon these phenomena of a most 
significant modern economic development — the transition from 
money to credit economy. 

The current conceptions of demand and supply which have 
been dominant in economic thought take little or no account of 
this development. They rest on a naive assumption of impossible 

9 It is to be understood, of course, that these figures and illustrations are 
merely arbitrary ; there is no necessary reciprocal relation between the extent of 
demand and supply -as here represented. 



26 JOURNAL OF POLITICAL ECONOMY 

market simplicity. They assume a market in which buyers and 
sellers are engaged exclusively in the exchange of consumption 
goods for their own immediate uses', in which, in other words, 
there are no exchanges of intermediate goods', or relatively perma- 
nent productive agents, no credit sales, and no bargains for future 
delivery. In short, they assume a market in which the time 
element is lacking. It is our purpose now to' rise above this 
naive conception of the market and to consider, sixthly, the effect 
upon the general character of demand and supply of the fact that 
bargains for purchase and sale are concluded with reference not 
only to' the quantity and price of commodities, but also to' the time 
of delivery and payment. In doing this we shall have by no 
means fully discussed the demand and supply effects of the time 
element. We shall have considered time merely in its relation 
to the general concepts 'demand" and "supply." Realizing the 
strangeness of the country through which we are to travel and 
the danger of going astray without the aid of familiar guide- 
posts, our attitude in this discussion will be that of an explorer 
who maps out the region as he sees it, but, realizing the limited 
range of his vision, waits eagerly the accounts of other travelers. 1 

If we are to understand the demand and supply potency of 
the bargain-time element, we must determine the effect of varia- 
tions in the time of payment and delivery upon the willingness 
and ability of prospective dealers to< offer and to take goods in the 
market. This involves first a discussion of the relation between 
valuation and the lapse of time. 

Intelligent observation of empirical data seems to' show that 
the postponement of the possession of a good detracts from the 
present worth of its acquisition. For example, the present worth 
of a dinner to a hungry man just drawing up to' it is greater than 
the present worth of the command by the same man over the 
same dinner postponed till the next day. A tired worker just 
starting on his annual vacation places a higher estimate on its 

1 The writer wishes to acknowedge his indebtedness to Professor Frank A. 
Fetter for directing his attention to the pervasiveness of the time element in 
modern economy, for fundamental notions in regard to the relationship between 
valuation and the lapse of time. He is also indebted, for important suggestions 
which have been worked out in the discussion, to Professor Herbert Joseph 
Davenport. 



THE DEMAND AND SUPPLY CONCEPTS 27 

worth to him than he does upon the power to command the vaca- 
tion of the following year. The economic explanation usually- 
offered for this generalization is in the main this: that deferred 
gratifications 2 are lessened in prospect. But whatever the psy- 
chological or psycho-physical basis of this fact may be, for the 
economist the proof of its generality must finally rest on simple 
experience. It is always open, therefore, to challenge from this 
standpoint ; but, clearly defined, it appears to stand the empirical 
test. In order to show this we shall have to inspect it somewhat 
more closely. 

It is not claimed, then, by those who intelligently adhere to 
this generalization, that the gratifications derived from an object 
postponed are actually lessened, or, to put the matter more objec- 
tively, that the worth to us of postponed goods is necessarily 
actually lessened. The enhancement to us of the worth of goods 
that we have previously stored up is among the commonest eco- 
nomic experiences. Evidently, then, the proposition must not be 
taken to mean more than that the postponement of the use of a 
good makes it of less worth to the individual at the time of the 
postponement than it would be if immediately used to gratify his 
needs. That is to* say 3 the estimates compared, if this proposition 
is to be valid, must be of present as against future worth made 
by the individual at a single moment of time. 

But will the proposition thus interpreted hold? Evidently it 
will not. The very fact that rational men do postpone the con- 
sumption or use of goods in their possession or under their control 
negatives the proposition as thus stated. The hungry man posses- 
sed of a dollar does' not contemplate eating two fifty-cent dinners 
today, and partly at least because he realizes that a greater sum 
of gratifications is to be had, or that to a greater extent his pur- 
poses are to' be subserved, by distributing the dinners over both 
today and tomorrow. So also the tired worker who> can command 
at will a month of vacation within two years very likely chooses 
to postpone half of it because of his belief that he will thus get the 

2 "Gratification," whenever it is used in this thesis, must not be interpreted 
as identical with pleasure or happiness in the crude hedonistic sense. It is here 
used to mean simply that complex of considerations which, together with its nega- 
tive, determines choice. 



28 JOURNAL OF POLITICAL ECONOMY 

maximum of gratification or better subserve his purposes. The 
hungry man knows that he will be hungry again tomorrow, and 
if he believes that his hunger then will be keener than today at 
the end of the first dinner, he may fix the future at a higher point 
than he will the present worth of it. The worker will be 
influenced by similar considerations, and in addition his action 
may be influenced by differences in the vacation possibilities of this 
and next year. If circumstances are such that this year he will 
be forced to spend his vacation in the city, while next year he 
believes that he will be able to take it at the seaside or in the 
mountains, where he feels perhaps that he may derive greater 
benefit, it is very probable that even at the present time the future 
vacation may seem the more desirable of the two, and he may 
even decide to forego any relaxation this year in order to spend 
the two weeks at present under his control in a more desirable 
manner in the future. Evidently, then, we must still further 
restrict the main proposition by stipulating that the comparison 
must not only be of the present as against the future worth of the 
good made at the time of postponement, but also that the indi- 
vidual making the comparison must assume that the relation of 
his need to the good will be essentially identical at the two points 
of time, and that the good itself will have essentially the same 
want-gratifying power in the future as at the present. Only if all 
these allowances are made can we say with certainty that the good 
postponed will appear to be of less worth than the good present. 
It may appear now to the reader that we have emasculated our 
proposition. This, however, is not true. We have merely guarded 
it against misstatement. The proposition was not that a post- 
poned good is lessened in value, but that the postponement of the 
possession or use of a good detracts from the present worth of 
its acquisition to the individual concerned. That is, that post- 
ponement per se detracts from estimated worth of acquisition. The 
actual present worth of the postponed good to the individual is an 
algebraic sum in which a discount for time always figures as a 
negative term. The actual result may be an amount which is 
more or less than the worth of the good for present uses, accord- 
ing to the specific variation in the other elements which we have 



THE DEMAND AND SUPPLY CONCEPTS 29 

considered. Postponement itself, however, is always an element 
lessening the present worth of acquisition of the postponed good ; 
and it seems clear, moreover, that this lessening of worth is in 
direct ratio 3 to> the extent of postponement, so that ultimately, if 
the postponement is long enough, the actual present worth of the 
postponed good, regardless of the accessory circumstances, must 
be diminished, falling in the extreme case to zero. 

Our first assumption, then, in regard to the effect of post- 
ponement upon valuation appears to be sound when tested by the 
facts of everyday life. However, it is to be observed that wc 
have thus far considered only one of two 1 equally important 
specific aspects of the question. Market bargaining involves not 
only prospective acquisition, but also prospective relinquishment 
of goods. Bidders contemplate not only the gratifications to be 
acquired in the acquisition of goods with their uses, but also the 
gratifications to> be sacrificed in the relinquishment of goods with 
their uses. The willingness and ability of A to take corn, for 
example, means his willingness and ability to offer money or 
some other good. Just as, then, we have considered the effect of 
postponement of possession or acquisition upon estimates of 
worth, so we must consider the effect of postponement — of relin- 
quishment — i. e., of non-possession; for the bargain-time element 
concerns the time both of delivery and of payment. 

At bottom the latter problem seems to be the reciprocal of the 
one just considered. Relinquishment is the reciprocal of acquisi- 
tion, sacrifice of gratification, the postponement of delivery the 
reciprocal of the postponement of payment for the same good. 
Accordingly, we should expect to find the effect upon worth of 
postponed relinquishment to be the reciprocal of the effect of post- 
ponement of possession. And this, in fact, seems to be the case. 
That is to say, the postponement of the payment for a good 
detracts from the present negative worth of relinquishment. Or, 
to put the matter in positive terms, the postponement of payment 
detracts from the present estimate of the worth to be relinquished. 

3 This statement is not intended to be taken as indicating that the lessening 
of worth is in exact ratio to the increasing of the time of postponement. It is 
fuerely intended to indicate that as the time of postponement increases the 
lessening of worth increases. 



30 JOURNAL OF POLITICAL ECONOMY 

The psychological explanation of this fact is usually considered to 
be that postponed sacrifices are lessened in prospect. But, what- 
ever its psychological basis, the main proposition seems amply 
proved by introspection and observation. 

However, this proposition must, like that concerning the 
effect of postponed acquisition, be strictly construed. It does not 
mean necessarily that the sacrifices undergone in the relinquish- 
ment of an object are necessarily lessened by postponement of the 
relinquishment, nor that the present estimate of the worth to be 
relinquished is always lessened by postponement of relinquish- 
ment. It means simply that, when the individual making the com- 
parison assumes that the relation of his need to the good is to be 
the same in the future as at present, and that the good itself is to 
be essentially the same, postponement of relinquishment will then 
lessen the estimate of the present worth to' be relinquished. In 
other words, postponement of relinquishment per se detracts from 
the estimated present worth to be relinquished, or sacrificed. This 
being admitted, observation and introspection seem to show also 
that the lessening of the sacrifice of relinquishment as estimated 
in the present is, other things being equal, in direct ratio* 4 to the 
length of time that relinquishment is postponed. 

The relation between valuation and the lapse of time seems 
then in its main aspects to be clear and simple. Postponement 
lessens the present importance both of deferred gratifications and 
of deferred sacrifices. Clear as may be the reasoning upon which 
this conclusion is founded, however, it must not be accepted if 
it can be shown to do violence to any of the undoubted facts of 
the market. Before attempting, then, to use it in generalization, 
in connection with the characterstics of demand and supply, it 
will be well to consider quite carefully possible contradictions to 
its validity in actual market experience. 

It seems reasonably clear, then, that if all the bidders in the 
market were men for whom the good bid upon and the good used 
in making payment had a direct personal and present use in con- 
sumption, postponement would always discount the present worth 
of gratifications and sacrifices, and that the conclusion which we 

4 See p. 29, n. 3. 



THE DEMAND AND SUPPLY CONCEPTS 31 

have drawn would, of necessity, be universal in its application. 
But is it true that ali the bidders in the market have a direct and 
immediate use in consumption for their goods? Evidently it is 
not. Barring money from consideration, in order to free the 
subject from unnecessary complication, by assuming that it is a 
good which may always be considered as desired for personal and 
immediate use, there are two cases at least where the interest in 
the goods taken by prospective purchasers and sellers is' not of 
this nature. There are cases, first, where the bidder has personal 
use for the good in question, but the usefulness of it to him lies 
exclusively either in the present or in the future. A contractor, 
for example, who is to construct a building the coming season, 
has no use in consumption for materials at present, but he is likely 
to be in the market now bidding for the goods to be delivered in 
the future at the time of his need. Secondly, there are cases 
where the sole interest of the bidder in the good in question is 
speculative in its nature; that is to say, where the bidder expects 
simply to pass the good acquired along at a profit, having no 
consumptive use for it, either present or future. The situation is 
so familiar that it needs no illustration. Both cases apparently 
involve exceptions to the bargain-time discount rules which we 
have formulated. The question for us then, is : Are these excep- 
tions real or merely apparent? Let us examine each case 
separately. 

Considering buyer and seller, and both good in question and 
means of payment, there are eight possible variations of the first 
case. They are, however, merely permutations of which the 
example already cited is typical. We shall be warranted, there- 
fore, in confining our attention to this example. Can we say, 
then, truthfully that where the prospective purchaser — e. g., the 
contractor — has little or no present use for the commodity in 
question, the postponement of its delivery to* a time when he has 
a positive or relatively great use for it detracts from its present 
worth ? Such a statement is, on the face of it, obviously absurd. 
But does this concession invalidate the principle of time discount? 
Reference to what has already been said justifies a negative 
answer. As we have seen, only where the relation between the 



32 JOURNAL OF POLITICAL ECONOMY 

Sfood and the needs of the individual concerned are assumed to be 
identical does the postponement of delivery necessarily result in 
a positive detraction from the present worth of the good. In so 
far, then, as the contractor may have present need for the com- 
modity identical with his future need, we are still justified in 
assuming that postponement of delivery per se lessens the present 
worth of acquisition, and will affect negatively the amount of the 
good which he will be willing and able to take at a certain hypo- 
thetical price per unit. 

But does this argument really dispose of the present case? 
Here we have a typical market situation, where on assumption 
there is no possible identity between present and future needs 
dependent on the good, because the prospective purchaser has no 
present use for the good Although, then, the principle of time 
discount remains valid where it applies, does not this case indi- 
cate that there are market situations which include the element of 
postponement where the principle of discount is not involved; 
in other words, have we not shown that the principle of time dis- 
count, while operative in certain market cases, is not of universal 
market application? Apparently this is true; but it will not do 
to give an offhand answer to a question of such great importance. 
We must examine it with all due care. 

Really we have here two distinct questions : ( I ) Is the time 
element as a factor determining demand or supply at all involved 
in a case of this kind ; and (2) if so, does postponement here oper- 
ate as a discount factor? Let us consider these questions in 
detail. 

First, then, in the case supposed above, where it is assumed 
that the prospective purchaser has no present use for the good, 
is the time element at all involved — does postponement in any 
way affect the present worth of the good? The argument against 
any such effect seems offhand, simple, and cogent : If there is no 
present use for the good, there is no present need for it ; how then 
can its immediate possession have any present worth, and how 
then can any comparison be instituted between the worth of pres- 
ent and future delivery? But if no temporal comparison can be 



THE DEMAND AND SUPPLY CONCEPTS 33 

instituted, it surely cannot be said that time enters as' a factor into 
the problem. 

This line of argument might perhaps be successfully com- 
bated by the subtle assumption that no case really can exist 
where goods are purchased for future delivery in the absence 
of a present need. And it seems not unreasonable to say, in sup- 
port of this view, that where the individual, as in this case, has no 
present use in consumption for the good in question, the insurance 
of the satisfaction of his future need for it creates of necessity 
a very positive present need — the need of present control through 
purchase. Holders of this view would assert that the actual 
presence in the market, at the moment, of prospective purchasers 
for future delivery would be inexplicable on any other assumption. 

But the possibility and actuality of temporal present-worth 
comparisons where goods are sought to be purchased for future 
delivery can be shown by a slightly different, and perhaps less 
subtle, line of reasoning. The essential purpose of the prospective 
purchaser in such a case is to secure a coincidence with the needs 
of a certain time in the future of the means for their gratification. 
This coincidence has a present worth to him, the simple proof of 
which is the insertion in such bargains of a forfeit to be paid in 
case of non-delivery at the time specified. The existence of this 
present worth being granted, it follows that it varies with the 
possibility of contract failure. Possibility of delay of means 
beyond the point of time when the needs are anticipated obviously 
would lessen the present worth of their future possession, and it 
is easily conceivable that the same effect might result from prema- 
ture delivery of the goods in question. There seems no doubt, 
then, that the time element does operate as a factor determining 
demand and supply in the class of cases typified by the purchase 
for future delivery in the absence of present consumptive needs'. 

This brings us to the second question in connection with such 
cases : Does postponement invariably operate as a discount fac- 
tor. The example just cited seems to require a negative answer, 
and thus to nullify the universality at least of the general assump- 
tion that postponement always detracts from the present estimate 
of gratifications to be acquired or sacrificed, and affects therefore 



34 JOURNAL OF POLITICAL ECONOMY 

in an invariable manner demand and supply. Are we driven at 
last, then, to abandon or modify this principle? No. Sound 
reason reveals it still triumphant. Where the need which prompts 
to purchase is wholly assigned to' the future and therefore condi- 
tions are such as to cause a bargain for a future delivery, we may 
still say with truth that the present worth of the gratifications to 
the purchaser which the good represents is less than it would have 
been had the want in question been felt in the present instead of 
in the future, and had the conditions therefore existed which 
would have caused a bargain for present delivery. 

In this case it is the need itself that has undergone discount, 
for time and discount of the need obviously involve, in this case, 
discount of the gratifications associated with the object which 
stands in causal relation to the satisfaction of that need. In this 
case, therefore, we may still say with truth that the amount of the 
good which the prospective purchaser is willing and able to take 
at a specified price is less than it would have been if conditions 
had been such mat the bargain might have called for present 
delivery. In short, there is nothing in this type of cases which 
invalidates our general principle that postponement detracts from 
the present estimate of gratification and sacrifice. 

Before, however, we can accept this principle and the con- 
clusions to be drawn from it without reserve, we must examine 
the second apparent source of exception to its validity. There are 
cases, then, in the market where the sole interest of the bidder in 
the good in question is speculative in its nature; that is to' say, 
where the bidder expects and desires simply to' pass the good on 
again at a profit. Apart from retail dealing, this seems to be 
almost the typical market attitude. Under such circumstances 
can it be said that future delivery detracts from the present worth 
of the good ? To get a concrete instance to work upon, take the 
case of a dealer in wheat on the produce exchange, who, having 
no interest in wheat except as a trader, determines in March 
to buy for May delivery. Can we say that the postponement of 
delivery in this case acts' as a discount on the worth of the acquisi- 
tion to' the prospective purchaser? At first blush an affirmative 
answer seems absurd, but let us analyze the situation carefully. 



THE DEMAND AND SUPPLY CONCEPTS 35 

The need which the prospective purchaser has for wheat is 
represented by his desire to turn over his capital at a profit. The 
strength of this need is in proportion to the percentage of profit 
that can be made on the operation. The motive of the prospective 
purchaser in desiring to contract for future delivery is' based on 
his belief that the selling price at that time will exceed the pur- 
chase price to a greater extent than it does at the present moment. 
But, as his need is measured by his profit, this is to* say that his 
need for wheat in May is estimated by him to be greater than his 
need for it at the present moment. And it is this difference in the 
relation between his wants and the good at the two different 
points of time that causes him to prefer the future delivery. If 
the principle at stake has been clearly comprehended, this analysis 
of the situation shows at once that the present case forms no 
exception of its operation. If the estimated money profit to be 
obtained by delivery in May were no greater than the profit result- 
ing from delivery in March, it is' obvious that March delivery 
would be preferred. But this is merely saying that, in so far as the 
estimated needs dependent on the good in question are identical 
at the two' periods of time, the postponement of delivery detracts 
from the present worth of the good. 

In the absence of contradictory evidence, then, we seem justi- 
fied in accepting, provisionally at least, and properly interpreted, 
the principles that the postponement of the possession of a good 
detracts from the present worth of its acquisition, and that the 
postponement of the non-possession or giving-up of a good de- 
tracts from the present estimate of the sacrifice involved in its 
relinquishment. In the absence of contradictory evidence, also, 
we seem justified in assuming that these principles underlie and 
affect the estimates of market bidders in all cases connected with 
the prospective purchase or sale of goods where postponement of 
delivery or payment, or both, are contemplated. If this much be 
granted, the following conclusions in regard to' the general rela- 
tion between the time element on the one hand, and individual 
demand and supply motives on the other, must also be provision- 
ally accepted: (a) In the case of the prospective purchaser, first, 
postponement of delivery must tend to lessen the willingness to 



36 JOURNAL OF POLITICAL ECONOMY 

take a good from the market, because it lessens the present worth 
of the good to be acquired, and we can safely assume that a man's 
willingness to purchase goods, other things being equal, will 
depend on his estimate of their present worth to' him; secondly, 
postponement of payment must tend to increase the willingness 
and ability to take a good from the market because it lessens the 
present worth to be sacrificed, and a man's willingness and ability 
to purchase, other things being equal, obviously depend on the 
extent of the sacrifice made at the time of the bargain, (b) In 
the case of the prospective seller, first, postponement of delivery 
must tend to increase the willingness to bring forward a good in 
the market, because it lessens the present worth to be sacrificed; 
secondly, postponement of payment must tend to lessen the will- 
ingness' and ability to bring forward a good in the market, because 
it lessens the present worth of the payment to be received, (c) 
It follows' that at any given hypothetical price series, other things 
remaining the same, first, postponement of delivery must tend to 
decrease the demand of individual bidders in the market for any 
given good, and to increase the supply of the good which indi- 
vidual bidders will bring forward to the market; secondly, post- 
ponement of payment must tend to increase the demand of 
individual bidders in the market for any good, and to decrease the 
supply of the good which individual bidders will bring forward to 
the market, (d) Finally, on our original assumption that total 
market demand and supply of any good represent the summation 
of the demand and supply of individuals, we reach the conclusion 
from the above that, first, all other things remaining the same, 
postponement of delivery must tend to decrease the total market 
demand, and to> increase the total market supply of any given 
good; secondly, postponement of payment must tend to increase 
the total market demand, and to decrease the total market supply 
of any given good. 5 

Thus we finally and definitely seem to have estabjished as' a 
sixth general characteristic that the demand and supply of a 
commodity are to be expressed as' correlations of the three fac- 

6 In all this the reader is begged to bear in mind that the term "market" is 
used in the abstract generic, and not in the specific, sense. 



THE DEMAND AND SUPPLY CONCEPTS 37 

tors — quantity, price, and time. It remains in this connection 
to exhibit concretely the general character of these phenomena 
as resultants of this threefold correlation. 

We have seen that, abstracting from the time element, demand 
and supply may each be expressed as a single schedule of corre- 
lated quantities and hypothetical prices ; the demand schedule rep- 
resenting the varying amounts of the good in question, which 
prospective purchasers are willing and able, or are imputed to be 
willing and able, to take at all possible hypothetical prices; the 
supply schedule, the varying amounts which prospective sellers 
are willing and able, or are imputed toi be willing and 
able to bring forward at corresponding hypothetical prices. 
If we accept these schedules as adequate concrete expressions 
of demand and supply, when the time element is disre- 
garded, it becomes obvious that they are also> perfectly valid ex- 
pressions of demand and supply when the time element is taken 
into consideration, provided that this element is assumed to be 
invariable. That is to say, if in the market, bargains invariably 
specified exactly the same conditions in regard both to delivery 
and to payment, the calculations of prospective purchasers and 
sellers would always be made on the assumption of an invariable 
temporal agreement, and the single schedules which we have used 
would still be adequate expressions of demand and supply con- 
sidered as correlations of the three elements. Let us then assume, 
as we may without error, that these schedules adequately represent 
demand and supply in the case of the simplest bargain type — 
where, that is to say, the market agreement calls for cash down 
and immediate delivery. Our present task will then be to show 
how this schedule must, if at all, be modified, or what, if any, 
additional schedules must be constructed in order to give a com- 
plete expression of demand and supply under all possible temporal 
bargain conditions. 

In general, there seem to be three solutions of this problem 
which are worthy of consideration Each of these is based on a 
distinct notion in regard to the essential nature of time as a 
market factor. In the first solution time is assumed to be an 
independent good bought and sold in the market ; in the second, 



38 JOURNAL OF POLITICAL ECONOMY 

time, in its double market aspect, is regarded as an essential ele- 
ment, on the one hand of price, and on the other of the good in 
question ; in the third solution both these assumptions are denied, 
and time is looked upon, as hitherto in this thesis, as a distinct 
market-bargain factor co-ordinate with price and quantity of 
good. We shall consider these solutions in order. 

According, then, to the first view expressed above, a given 
concrete market bargain, where the time element is present, is 
not the resultant of a simple co-ordination or correlation of the 
three elements — quantity, price, and time. It is rather the final 
resultant or compound of two independent correlations — a cor- 
relation of price and quantity, and another correlation of price and 
time. In other words, every concrete market bargain represents 
logically the resultant of two acts of purchase and sale. That 
is to say, first, the good in question is itself purchased or sold 
for a given price regardless of any temporal consideration, and, 
secondly, the privilege of postponing delivery or payment, or 
both, is bargained for at a certain price. The price finally actually 
paid, then, is to be looked upon as the sum paid for two goods — 
for a certain quantity of commodity and for a certain temporal 
privilege. 

To make the matter perfectly clear, take a concrete case. A 
sells a ton of coal to B to be delivered at once and paid for one 
month from date. This matter, which appears superficially as a 
single bargain, really involves two independent transactions, 
according to the view under examination : first, the purchase by 
B of a ton of coal at a certain price, and, secondly, the purchase 
by B at another price of the privilege of postponing payment for 
one month. Or, looking at the matter from the opposite stand- 
point, we may say that A sells, first, a ton of coal at a certain price 
and, secondly, the privilege of postponement of payment at a 
certain price. The illustrations might, of course, be greatly varied 
according to the temporal bargain conditions assumed and the 
particular standpoint taken, but this will be sufficient perhaps to 
indicate the essential significance of the double-bargain proposi- 
tion. 

In this view, then, there is in the market at any time a single 



THE DEMAND AND SUPPLY CONCEPTS 39 

prevailing price for any given commodity, and time is simply one 
of the commodities bought and sold, having therefore its own 
single prevailing rate or price. It follows that, in all bargains 
for commodity x where postponement of payment or delivery is 
agreed upon, while the superficial observer, assuming that the com- 
modity alone is purchased and sold, sees evidence of a variation in 
the price of the commodity x, the enlightened observer knows that 
the real price paid for x is the same regardless of the temporal 
agreements, and sees' in the apparent variation of price a purchase 
of time — the price paid for time acting as an equalizer in all con- 
crete sales. The view here expressed, it is pointed out, receives 
confirmation in the everyday language of the market when we 
speak of selling a good at a certain price, so much off for cash, 
or so much additional for credit. 

This analysis and illustration of the concrete nature of a 
market sale indicate clearly how, according to the first solution 
named above, the time element finds concrete expression in 
demand and supply. Whenever in the concrete case the prospec- 
tive purchaser or seller of a commodity (not time) contemplates 
the possibility of purchasing or selling for future delivery or pay- 
ment, he enters the market with at least two distinct schedules in 
mind — one representing demand or supply, as the case may be, 
of the commodity (not time), the other representing demand or 
supply of time. 

For example, A, let us suppose, is a prospective purchaser of 
some commodity, x. If he is altogether unwilling to accept post- 
poned delivery and is committed irrevocably to' cash payment, 
the time element will not enter into his considerations, and his 
demand for x may be adequately represented by the single sched- 
ule given on page 47. In so far as all prospective purchasers 
in the market are in the same mood as A, this schedule may be 
made adequately to represent the general demand for x in a 
given market. If A, however, desires credit, or will consent to 
postponement of delivery, he will naturally enter the market with 
more or less well-defined notions of what he is willing and able 
to do in case credit may be obtained or immediate delivery is to 
be foregone. That is' to say, he will take into consideration the 



4© JOURNAL OF POLITICAL ECONOMY 

time element. In such cases, according to the double-bargain 
theory, it is evident that, in addition to the schedule of the 
amounts of the good x that he is willing and able to take at all 
varying hypothetical prices, he will have in mind also a time-price 
schedule. This additional schedule will represent time discounts. 
It will consist, in case he contemplates postponement of delivery, 
of the varying lengths of time of postponement which he is willing 
and able to allow at various hypothetical discount rates or time 
prices. If he contemplates postponement of payment, his time 
schedule will consist of the varying amounts which he is willing 
to pay for varying degrees of credit extension. But these time 
schedules, according to' this view, represent in the first case supply 
and in the second case demand for a quite distinct commodity. 
They exist and are specifically determined quite independently of 
the commodity x, whose price under all temporal conditions is 
invariable, and whose demand is still the simple, original schedule 
given. Similar illustrations might be given for supply, which is 
held to be in all essential respects analogous to demand. 

To sum up, then, according to the view just considered : The 
real price paid for any commodity (not time) is always its cash- 
immediate delivery price; the real demand and supply of any 
commodity (except time) are the varying amounts of it which 
prospective purchasers and sellers are willing and able, or are 
imputed to be willing and able respectively, to take and bring 
forward at all possible hypothetical prices ; time is an independent 
commodity or good ; the price of time is the prevailing discount 
rate ; the demand and supply of time are respectively the varying 
amounts of credit extension for which bidders are, or are imputed 
to be, willing and able to pay varying hypothetical prices, and the 
varying amounts of postponement of delivery which bidders are, 
or are imputed to be, willing and able, to' allow at varying hypo- 
thetical prices ; any ordinary concrete bargain in which time enters 
as postponement of delivery or of payment, or of both, involves 
two distinct price payments and two* distinct demand and supply 
calculations; that is to say, in such a market-bargain the three 
elements — quantity, price, and time- — are finally correlated 



THE DEMAND AND SUPPLY CONCEPTS 41 

through the summation of the results of two simple correlations 
of two terms each. 

This view of the nature and effect of the market time element 
apparently makes the objective demand-and-supply problem a 
very simple one. We must now inquire whether there are any 
serious objections to its acceptance. 

In the first place, is there not an element of unreality in this 
subtle analysis of the market situation ? Does not this view place 
a strained interpretation upon the actual attitude of men who 
enter the market contemplating credit and future delivery bar- 
gains ? These are questions, of course, on which the mere observer 
can secure only inferential evidence. The positive data are 
entirely subjective, and no man can, apart from elaborate induc- 
tive study, give positive answers except for himself. There is 
room here, therefore, for honest difference of opinion. 

It is the opinion of the writer that the typical bidder who 
enters the market to purchase or sell a given commodity is' not 
consciously contemplating bidding for two distinct goods. He is 
certainly conscious of the existence and significance to him of the 
time element in connection with the commodity which he intends 
to buy or sell ; but does he not always think of the time element 
as most intimately associated with the good — as a quality which 
modifies for him the usefulness of the commodity in question? 
That is to say, does not the time element appear to him always as 
somewhat in the nature of a coefficient of some other good, and 
while, as in the loan market the coefficient appears to outrank the 
importance of the good itself, are not these two things always 
thought of as standing to each other, not in arithmetic, but in 
algebraic relation ? It appears to the writer that this is the case, 
and that this attitude is but the natural reflection of the essential 
nature of the objective situation. The fact is that, if it should 
prove to be true that time is an economic good, it would certainly 
not be a substantive, but always an adjective good. That is to 
say, time is never an independent market commodity and has sig- 
nificance in the market only as attached to some substantive com- 
modity or commodities. Mere time, in other words, is not bought 
and sold. It has no demand-and-supply schedule, and no price 



42 JOURNAL OF POLITICAL ECONOMY 

apart from some other good. If this be true, however, we seem 
forced to abandon the double-market-bargain theory in favor of 
one or the other of the alternative views earlier suggested. 6 

The argument against the double-bargain theory leads up to 
the second hypothetical solution, mentioned on page 32, which is 
based on the assumption that time in its market relationship is an 
essential element, on the one hand of price, and on the other of 
the good which prospective purchasers and sellers are contemplat- 
ing. According to this view, whenever a good is bought and sold 
in the market, and the time element is present, this element does 
not appear either as a distinct good which is separately bargained 
for, or as a distinct and independent bargain element, but is 
assimilated, in the case of postponement of delivery, with the 
good, and in case of a postponement of payment, with the price. 
In other words, every variation in the market-bargain time ele- 
ment in connection with the purchase and sale of a given physical 
or objective commodity creates a new good or a new price. In 
short, from this standpoint a single kind of physical commodity 
in the market, uniform in quality — as for example, No. 1 May 
wheat — really consists of as many different and distinct kinds of 
economic goods as there are variations in the time of delivery con- 
templated by prospective or actual purchasers and sellers; and, 
on the other hand, a given amount of money which is to be paid 
for a unit of the physical commodity, say a bushel of wheat, really 
constitutes as many different prices as there are different degrees 
of postponement of payment contemplated by prospective or actual 
purchasers and sellers. Whenever, therefore, a variation occurs 
in the market time element — for example, when the time element 
is introduced as credit — it does not mean that an amount of a 
good is offered or taken at the same price as before, but that a 
new price for this article exists. Also, when the time element 
enters as a postponement of delivery, we have a new good, and 
thus evidently a new and distinct price problem. 

6 The really decisive consideration against what we have called the double- 
market-bargain theory of demand and supply lies outside the possible scope of 
this paper. It will appear in the sequel, however, that when the time element 
enters into the bargain for a commodity, the true basis upon which is reckoned the 
utility of the commodity per se as supply is essentially different from what it is 
when the bargain contemplates immediate cash payment and immediate delivery. 
To the initiated this fact is conclusive evidence. 



THE DEMAND AND SUPPLY CONCEPTS 43 

To make this matter perfectly clear, take again a specific 
example. A wishes to buy a ton of coal from X, for which he is 
willing to pay $5 cash for immediate delivery ; B also wishes to 
buy this ton of coal, and is willing to- pay $5 cash for delivery 
three months later ; C also> wishes the coal, but demands immediate 
delivery, and is willing to pay $5 one month from date of sale and 
delivery. Now, according to the view which we are contemplat- 
ing, under these crcumstances this ton of coal is not one but two 
distinct economic goods. If A or C succeed in trading, they get a 
different good from that obtained by B if he secures the coal. 
On the other hand, if A or B trade, they pay a price for the coal 
which is different from that which C pays if he succeeds' in mak- 
ing a bargain for it. 

If this view be accepted, the problem of the effect of the time 
element on demand and supply — the final correlation of the three 
market elements — is solved by merging the third element (time) 
with either or both of the other two ; in short, by denying its inde- 
pendent existence. The number of distinct goods and of possible 
prices in the market is enormously increased, but the demand and 
supply of each good is adequately represented by the simple 
quantity-price demand and supply schedules and curves which we 
have already constructed. The only changes which we should 
be obliged to make in our demand and supply illustrations would 
be that, on the one hand, instead of constructing a single demand 
and a single supply schedule or curve for commodity x, we should 
be obliged to construct separate schedules and curves for commod- 
ity x delivered immediately, for commodity x delivered three 
months from date, or at any other time; and, on the 
other hand, instead of allowing $5 to represent one price 
in the construction of each of these schedules and curves, 
we should be obliged to allow $5 to represent a descending 
series of prices, beginning with $5 cash and running down to the 
greatest possible hypothetical credit extension in the market. In 
concluding this exposition, it should be noted that, though, 
according to this yiew, the demand and supply of a single eco- 
nomic good are adequately represented by schedules and curves as 
simple as these which appear on pages 47 and 48 still the demand 



44 JOURNAL OF POLITICAL ECONOMY 

and supply of any given physical commodity in the market where 
the time element appeared in the form of variable degrees of post- 
ponement of delivery could be completely expressed only by a 
series of irreducible schedules and curves analogous to those just 
mentioned. 

What now, is to be said as to the validity of this disposal 
of the time element as a demand-and-supply factor? As in the 
case of the double-market-bargain theory, it does not seem wise 
here to dogmatize. Here also there seem to be reasonable grounds 
for honest difference of opinion. However, again it appears to 
the writer that the best solution of the problem has not been 
found. If we were at liberty to construct a new economic ter- 
minology, there might perhaps be no' fundamental objection to 
defining price as a definite amount of a price-good paid at a 
definite time. In the terminology which we have, however, price 
seems to* have no such general connotation, but is understood to 
be a definite quantity of a given commodity simply. On the other 
hand, it must be admitted that we have the beginnings of such a 
terminology in such expressions as "price, $5 net." Still, as' 
things stand, price seems to be an objective thing. It is an 
amount of a commodity paid; it is a dollar, a bushel, a day's 
service, a sonata. It has its varying subjective worth, like all other 
objective things. But it would seem to be straining the point to 
say that it is a different price when this worth varies. If this' 
view were taken, a good which sold invariably for $5 cash would 
have as many different prices, for aught anyone could tell, as 
there might be different individual purchasers of it. If variation 
in the time element is, however, assumed to alter price, it is simply 
because of the variation in the subjective worth of the given 
amount of objective commodity paid at the different times. But 
if we cannot say that $5 is a different price when paid by A than 
when paid by B, because of difference in subjective worth, how 
can we say that it is a different price when paid by A at two 
different periods, because it represents at the different periods' dif- 
ferent subjective worths to him? If we are to avoid unnecessary 
readjustments of terminology, it would seem necessary to< reject 



THE DEMAND AND SUPPLY CONCEPTS 45 

the idea that the market time element as represented by postpone- 
ment of payment may be assimilated with price. 

Turning to the other side of the question, the objections to 
the view under discussion seem to be at least as potent. Accord- 
ing to this view, it will be remembered, every variation in the time 
of delivery of a given physical commodity makes of it a new eco- 
nomic good. If we view this matter from the standpoint of two 
individuals, the proposition at once appears untenable. Surely x, 
other things remaining the same, is one and the same good though 
A, desiring it, demands immediate delivery, while B is willing 
to accept it a month from the date of the bargain. The exigencies 
of theory do not seem to warrant us in wrenching ourselves loose 
from the common-sense point of view with such violence as the 
denial of this proposition would require. Moreover, if we look at 
the question from the standpoint of a single individual, the 
outcome seems equally unfavorable to this view-point. The 
reason for asserting that a change in the time of delivery creates 
a new economic good is evidently that the objective or physical 
commodity plus postponement does not mean the same to 1 an 
individual measured in gratifications as does the good without 
postponement of possession. But this' is merely saying that the 
psychic income derived from the commodity, under the different 
temporal conditions, varies. However, variation in the psychic 
income from a good seems hardly sufficient ground for denial of 
its identity. 

In short, it seems altogether reasonable to say that an eco- 
nomic good as it appears in the market is an objective thing. It 
may stand in different relations to my wants, and possess different 
degrees of utility for me at different times, but it is still the same 
good. Its time relation to> me is analagous to its quantity relation. 
The good is not changed in character when its quantity is 
increased; why, then, is it changed in character when a time rela- 
tion is changed which involves no greater alteration in its utility 
to me than the change in quantity ? On the whole, then, it seems 
best to reject the second solution offered in explanation of the 
demand-and-supply potency of the market-time element. 

Having no other present alternative, then, we are obliged to 



46 JOURNAL OF POLITICAL ECONOMY 

fall back upon provisional acceptance of the third solution men- 
tioned earlier. According to this view, time, as it functions in the 
market, is neither an independent good nor an essential element of 
price or good. On the contrary, it is an integral and inde- 
pendently varying element of the market-bargain. From this 
standpoint a good has for the individual who« contemplates pur- 
chasing or selling it varying degrees of utility, according to vary- 
ing degrees of postponement of payment or delivery. Conse- 
quently, at any given hypothetical price the quantities of the good 
which the individual will be willing and able to bring forward as' 
supply or to' demand will vary with each variation in the time 
element, other things being equal. If this be true, the demand or 
supply of a commodity at any given hypothetical price will be 
represented by varying amounts as the time element varies. We 
are brought, in short, to look upon our cash-immediate delivery 
schedules illustrated on pages 47 and 48 as expressing one of a 
great variety of possible correlations of quantity price and time in 
connection with the demand and supply of a commodity, all of 
which together constitute the general demand and supply of the 
commodity in question at any given place and time. In short, we 
seem driven to the conclusion that the demand and supply of any 
commodity at any place and time must be represented by a series 
of schedules, each of which represents the amount of the com- 
modity in question which prospective purchasers and sellers 
respectively are, or are imputed to be, willing and able to take 
and to offer at all possible hypothetical prices, in consideration of 
a specified time or times of delivery and payment. 

In order to make this statement perfectly clear, and to furnish 
an unequivocal basis for the determination of the question whether 
or not we have really reached a true and final expression of 
market demand and supply, we must have concrete illustration. 
It is understood, of course, that, according to the view stated 
above, every possible essential variation in the bargain-time ele- 
ment results in a distinct demand or supply schedule variation. In 
order to make possible any practicable concrete illustration, then, 
we must make a selection of temporal market-bargain variations. 
Let us then select on the basis of bargain types. 



THE DEMAND AND SUPPLY CONCEPTS 



47 



A little consideration shows that there are at least four pos- 
sible distinct types of bargains in the market resulting from varia- 
tions in the time element. There is, first, the simple cash bargain 
— a purchase and sale on the terms of immediate payment and 
immediate delivery; secondly, the simple deal in futures — a pur- 
chase and sale for future delivery and future payment; thirdly, 
the credit sale, which calls for immediate delivery and future pay- 
ment; and, fourthly, conceivably, a bargain which calls for im- 
mediate payment and future delivery. With the exception of the 
first, each of these types, as indicated above, is capable of infinite 
specific variation through variation in the extent of the time 
allowed for payment or delivery ; but we may assume, for illustra- 
tive purposes, that each type is invariable. We obtain thus in the 
case of commodity x the following concrete illustration of our 
last conclusion in regard to the nature of demand and supply as 
correlations of the factors — quantity, price, and time: 

Demand Schedule 





Units of Commodity Hypothetically to be Taken 


Hypothetical 
Price 


Cash Sale 


Future Payment 
and Delivery 


Credit Sale 


Present Payment and 
Future Delivery 




10,000a; 
7,000a; 
5,000a: 
3,500* 
2,500a; 
2,000a; 


5,000a: 

2,000a; 

1 ,000a - 

600a; 


12,000a; 
9,000a; 
7,000a; 
5,500a; 
4,500a: 
4,000a" 


2,000a; 




1,000a; 
500a: 
250a; 




ey 











Hypothetical 
Price 



DEMAND CURVE 




Cash -Sale Curve 
. ' ,Credit-Sale Curve 
^. _Future-Payment-and-De- 

livery-Sale Curve 
. - - Present-Payment-and- 
Future-Delivery-Sale 
Curve 



hc u Ol A <n On^j00^ > JD^ , ^>O J **V 1 

"0 b "0 b b b b b b b b b b b b 
000000000000000 
000000000000000 

Units of Commodity 



4 8 



JOURNAL OF POLITICAL ECONOMY 
Supply Schedule 7 



Hypothetical 
Price 


Units of Commodity Hypothetically to be Disposed of 


Cash Sale 


Future Payment 
and Delivery 


Credit Sale 


Present Payment and 
Future Delivery 




4,000a; 
4,500a; 
5,500a; 
7,000a; 
9,000a; 
12,000a; 


600a; 
1,000a; 
2,000a; 
5,000a; 


2,000a; 
2,500a; 
3,500a; 
5,000a; 
7,000a; 
10,000a; 










7,000a; 
9,000a; 








15,000a; 





SUPPLY CURVE 




£_*- * •- * Cash-Sale Curve 

» * " Credit-Sale Curve 
~ w -Future-Payment-and-De- 
•^ livery-Sale Curve 
% Present-Payment-and- 
Future- Delivery-Sale 
Curve 



Units of Commodity 

By a process of exclusion we seem at last to have reached, 
then, a final conclusion in regard to the demand-and-supply 
potency of the bargain-time element. This conclusion must, how- 
ever, be taken merely as provisional. The thoughtful reader will 
immediately be assailed with doubts as to the validity of the results 
attained. One of these sources of doubt may be easily eliminated, 
but others can be adequately discussed only in the sequel. 

The query which may be at once disposed of is this : Is it not 
possible to unite in the one case the various schedules here assumed 
to represent demand, and in the other those assumed to represent 
supply, so that in each case we may have a single comprehensive 
and unified expression? Certainly the mind naturally strains 
toward this conclusion, and at first blush this seems to be a valid 
assumption. Careful examination, however, seems to show that 
such union is impossible. We may say, indeed, that altogether 

7 It is understood, of course, that these schedules, represent only arbitrary 
portions of the actual demand and supply of a commodity. A complete repre- 
sentation would show the quantities taken and offered at all possible hypothetical 
prices and for all possible times of payment. It is also to be understood that the 
relation here taken between the amounts demanded or supplied and the corre- 
sponding basis is arbitrary. 



THE DEMAND AND SUPPLY CONCEPTS 49 

these schedules represent total demand and supply for the com- 
modity supposed to be in question. But when we attempt to go 
farther and affect their actual summation, we find at once that we 
are attempting to add discrete things. It is like trying to add 
four apples and five pears. To show this clearly, let us take the 
simplest illustration. 

Suppose that at the hypothetical price, five cents, the demand 
for x could be represented thus : 

Ten units where cash is to be paid and delivery is to be immediate. 

Twelve units where three months' credit is to be allowed and delivery is 
to be immediate. 

Eight units where cash is to be paid and three months is to be allowed 
for delivery. 

Eleven units where three months' credit is to be allowed and delivery is 
to be three months postponed. 

A mere glance at this concrete example shows that here we 
have three distinct elements to consider, and it is manifestly im- 
possible to represent their combined results in a two^element 
schedule, unless we can find a method of reducing the third ele- 
ment to terms of one of the others. If the preceding argument 
has been followed, the impossibility of this reduction will not be 
doubted. These schedules, then, must be regarded as independent 
and irreducible. In this view no single and unified expression of 
total demand and supply is possible. 

It should now be obvious that the result which we have 
reached is altogether incompatible with the naive assumptions 
which have been current in economic discussion in regard to the 
nature of demand and supply, and the simplicity of the manner in 
which they determine the price of any commodity. In conse- 
quence, we should assign these assumptions to the limbo of once 
useful, but now outworn, machinery of discussion. But conceding 
this does not necessarily stamp with approval the machinery 
which we have installed. Indeed, if the demand and supply 
of a commodity are to be represented at any time and place 
by the irreducible schedules which we have constructed, and 
if it is still to be postulated that demand and supply deter- 
mine price, the question how this result is accomplished pre- 
sents a most complicated aspect, which at once involves us in a 



50 JOURNAL OF POLITICAL ECONOMY 

serious dilemma and casts the gravest doubt on the finality of our 
conclusion as an expression of specific market demand and supply. 
Do these irreducible schedules altogether determine the market 
price of the commodity? If so, are all those representing respec- 
tively demand and supply of equal or of varying importance? 
How shall we determine the part played by each — their relative 
importance? But how, after all, is it possible to conceive of the 
process by which these distinct and irreducible schedules unite to 
determine a single market price? On the other hand, if we 
abandon the notion that demand and supply as a whole determine 
market price, must we not assume that each pair of schedules' 
determines a price? If so, which of the various possible prices is 
the market price we are seeking? That is to say, which are the 
demand and supply of which economists have been so fond of 
discoursing? 

Evidently, on the basis of our present conclusions, if we are 
to retain the demand-and-supply formula, we are driven to choose 
between two alternatives: (i) either we must reject the single- 
market-price theory and say that a given commodity may have a 
great number of prices in the same market at the same time; or 
(2) we must abandon what might be called the single-market 
theory and say that there are as many distinct markets for a com- 
modity at a given time and within a so-called competitive area 
as there are distinct types of bargain based on differences in time 
of payment and of delivery. If we accept the second alternative, 
we abandon the notion that demand and supply as a whole at any 
time and within any so-called competitive area determine the 
price of a commodity, in favor of a specific demand-and-supply 
formula, assuming practically that each pair of irreducible de- 
mand-and-supply schedules represents the demand and supply of 
the commodity in a different specific market. 

Intelligent choice between these alternatives can evidently be 
made only after a careful consideration of the nature of a market. 
We find ourselves, then, committed in the further prosecution of 
our problem, precedent to the discussion of the market process, to 
a study of the nature of markets, and the specific character of 
market demand and supply. In this study we shall be obliged, 



THE DEMAND AND SUPPLY CONCEPTS 51 

among other things, to determine (1) to what extent, if at all, 
there may be various independent markets for the same com- 
modity within a so-called market area, (2) whether or not the 
essential nature of a market varies with the character of a good, 
and (3) whether it is possible to find single universal expres- 
sions respectively for specific demand and supply in all markets 
and for all kinds of goods. 

Robert F. Hoxie 

University of Chicago 



LIBRARY OF CONGRESS 



013 716 980 



